How to Discuss Pay With Your Employees

Talking about money with your employees can be uncomfortable. Even when you’ve got good news to share — a generous bonus or a well-deserved promotion — assigning a number to the value of someone’s work is tough. It’s especially difficult if you’re not the one calling the shots (most managers don’t set their own compensation budgets). Whether it’s your decision or not, one thing is certain: it’s a critical part of a manager’s job to have frank and open discussions with employees about pay.

What the experts sayAccording to a recent PayScale survey, 73% of leaders don’t feel “very confident” in their managers’ ability to have tough conversations about compensation with their employees. This is in part because many bosses lack the information they need to do so, notes Tim Low, Vice President of B2B Marketing at PayScale. But it’s also because these types of discussion can be challenging — for the manager and the employee. “It’s awkward for everybody,” says Karen Dillon, author of HBR Guide to Office Politics and co-author of How Will You Measure Your Life?Still, avoidance is not an option. As V. G. Narayanan, the Thomas D. Casserly, Jr. Professor of Business Administration at Harvard Business School and chair of the Board of Directors Compensation Committee Executive Education Program, says, “These are the most important conversations you have throughout the year.” Here’s how to master them.

Talk early and oftenWhen you sit down with an employee to talk about salary, there shouldn’t be any surprises. “The more frequently you have the conversation, the easier it is,” says Narayanan. He suggests you start the year by discussing compensation. Talk about what kind of bonus or raise the employee might expect if she meets her goals — or doesn’t. Then have regular check-ins throughout the year to talk about how he is performing. That way, he won’t be taken aback by your formal evaluation and salary decision at the end of the year.

In that initial conversation, you might consider asking the employee what they expect in the coming year in terms of a raise and bonus. Narayanan says this can help stave off later disappointment and level expectations. Plus, he explains, if you allow your employees to imagine themselves in the decision-making role, they’re likely to be much fairer.

Do performance evaluations separatelyCompensation should be linked to performance, but Low advises discussing the two topics separately. “If you talk about money in the shadow of performance, it will sound like white noise and your employees will just fixate on the compensation,” agrees Narayanan. Instead, deliver the formal evaluation first, focusing on personal growth and development. Then wait several weeks to deliver news about raises or bonuses.

Involve others, if possibleEveryone has favorite employees — “We’re human beings — we like some people and don’t like others,” Narayanan says — but there are ways to counteract those natural biases. He recommends working on compensation decisions in teams of two or three. ”When more people make the call, employees know there are checks and balances, and that the process is fair and consistent.”

Prepare for the conversationDillon says that rookie managers often make the mistake of walking into these conversations without a plan. Even if you’re a seasoned leader, it’s helpful to work out what you’re going to say ahead of time. Write down your main points and rehearse them. Think through how you’re going to represent the company while also being yourself. “You have to wear the corporate hat but you don’t have to act like a robot,” says Dillon. She suggests using empathy to prepare. “Ask yourself: How is this person going to hear my message? It’s unlikely that you’ll be giving them a raise they’ll be absolutely joyous over. But what you say should persuade them that what you are giving them is fair,” she says.

Communicate their valueIn most cases, this conversation is an opportunity to tell employees how important they are to the organization. “You’re in a partnership with your employee and you have to let them know that you deeply value their contributions,” says Dillon. Don’t just let the bonus or raise figure speak for itself. Make it clear that you appreciate their work. “You want to inspire them to continue to create value,” says Narayanan.

Provide contextWhen employees are disappointed by their raise or bonus, it’s often because they lack information. “They might be a cog in a wheel but they have to understand the wheel,” says Narayanan. Share the big picture with them: How the company is performing compared with competitors and the range of raises or bonuses the organization is offering this year. Low suggests: “Ground it in facts. Explain what people are getting for this job with this title in this market with these skills,” says Low. “It’s incumbent on you to understand what it means to be paid fairly.”

You’ll also want to explain how the decision behind the numbers was made. This can be difficult if you weren’t the one making the call — but give as much information as you can. Don’t engage in conversation about other employees’ pay. If someone gripes that a colleague is making more, respond with something like, “I’m only willing to talk with you about your compensation and performance. It’s not fair to talk about others.”

Be ready for a reactionEven if you think you’re giving great news, be prepared for some emotion. These are loaded conversations. “You can’t be Santa Claus and give everyone everything they wish for,” says Narayanan. “When an employee gets upset, make sure you hear them and recognize their emotions but don’t cave,” warns Dillon. If there’s a way to address their concerns — perhaps you can see if there’s more money available — offer to get back to them in a few days. It’s your job to go to bat for the employee if you feel it’s warranted. “But don’t leave the door open unless you intend to take action,” she says. Whatever you do, don’t reward managers for throwing tantrums. That sets a bad precedent for future conversations.

Principles to Remember

Do:

Make clear how much you value the employee — don’t let the bonus or raise speak for itself

Explain how the decision was made so the employee understands you’re being fair

Rehearse what you’re going to say and how you’re going to respond to any complaints

Don’t:

Wait until the end of the year to talk about compensation­­ — it should be an ongoing conversation

Deliver compensation news at the end of a performance review — space the two conversations out

Be surprised if the employee gets upset — even if you think you’re delivering good news, it might be less than she expected

Case study #1: Help your employee prepare for bad bonus newsRavikrishna Yallapragada had a tough message to deliver. One of the software developers on his team (we’ll call him Chad) wasn’t hitting his targets. “As a result, he wasn’t going to receive a salary increase, bonus, or stock,” Ravi says. Fortunately, the news didn’t come as a surprise. Ravi had been talking with Chad since the beginning of the year about how compensation decisions would be made. “At that time, I explained how performance was linked to pay,” he says. Chad knew that if he exceeded expectations, his bonus would be within a certain range, but if he missed his goals, it would be zero.

Ravi also had several one-on-one meetings with Chad through the year to give him feedback on what was going well and what needed improvement. Because his employee was underperforming, Ravi also documented the discussions every two months. At their year-end meeting, Chad was initially upset. “But as I showed him the data, he accepted the fact. He knew why he wasn’t getting a raise or bonus,” Ravi says. “I then coached him on how he could avoid this next year and asked him to take responsibility to improve his performance.”

Unfortunately, despite Ravi’s best efforts, Chad didn’t improve his performance and he was eventually let go.

Case study #2: Explain the rationale behind compensation decisionsTwo years ago, Mila Deconda (not her real name), the COO of a New York state agency, hired a deputy CIO to join her team with the intention of quickly promoting her. The current CIO had been underperforming and Mila wanted to let him go once Sara (also not her real name) was up to speed. After eight months, Mila offered Sara the senior position. “But when I told her what the salary was, she was kind of shocked,” Mila says. It was a $10K increase over Sara’s deputy CIO salary but still significantly lower than what she’d made in her previous job. “She had taken a significant pay cut to come here and I knew she was expecting more, especially because she had an insider perspective and knew how hard the job was going to be,” Mila says. “So I knew going into the conversation that she was going to be upset.”

She started by explaining how valuable Sara had become and how much she wanted her to take the role. Then she explained the reasoning behind the limited raise: The agency was under incredibly tight budget constraints and simply couldn’t have salary parity with private sector jobs or other public sector ones.

Sara came back to Mila a few days later with a PowerPoint showing what people in similar positions at other agencies and in the private sector were making. “She wanted to demonstrate that the number wasn’t competitive, and she was right,” Mila says. “But I asked her to see the situation from my perspective. She knew she was already the highest paid person on my team. If I increased her salary, I would lose credibility with everyone else. It was a really hard conversation but she understood the position I was in.”

Instead of additional money, Mila offered Sara other benefits, including a bigger staff. “I’ve compensated by letting her hire new people to her team and finding other ways to signal to her that I support her hard work.”